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TMI Blog2023 (10) TMI 910X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 41 - irrecoverably written off amount receivables from the assessee - assessee continued to claim the same as sundry creditors in their books of accounts - The facts proves that the assessee is absolved of their liability of Rs.16 .09 lacs and hence, we hold that the ld. CIT(A) has rightly confirmed the addition made by the AO. - BEFORE SH. SAKTIJIT DEY, VICE PRESIDENT DR. B. R. R. KUMAR, ACCOUNTANT MEMBER For the Appellant : Sh. Kanchan Kaushal, FCA For the Respondent : Sh. P. Praveen Sidharth, CIT DR ORDER Per Dr. B. R. R. Kumar, Accountant Member: The present appeals have been filed by the assessee against the orders of ld. CIT(A)-2. New Delhi dated 07.04.2015, 03.03.2016 and the order of ld. CIT(A)-35 dated 15.03.2017. 2. In ITA No. 5118 /Del/2015. following grounds have been raised by the assessee: 1. DISALLOWANCE OF OTHER INCOME FOR THE COMPUTATION OF PROFIT ELIGIBLE FOR DEDUCTION U/S 80IA OF THE ACT Rs. 2,44,94,806 On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in confirming the disallowance on account of understanding the provision contained in section 80IA of the Act regarding co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. The action of authorities below is wrong, illegal, misconceived, unjustified and bad at law therefore it should be quashed. 3. Claim of Debenture Redemption Reserve ( DRR') created during the year for Rs. 100 Crores On the facts and in the circumstances of the case and in law Ld. CIT(A) has erred in not allowing the Reserve created as per requirement of the statute towards redemption of debentures issued by the company as a deductible item for the purpose of working the tax liability u/s 115JB of the Act. The Ld. CIT(A) erred by holding that the DRR created is not in nature of a provision for ascertained liability in absence of specific provision under the Act. 4. In ITA No. 2741 /Del/2017, following grounds have been raised by the assessee: 1. DISALLOWANCE OF OTHER INCOME FOR THE COMPUTATION OF PROFIT ELIGIBLE FOR DEDUCTION U/S 80IA OF THE ACT- Rs.24, 955,769 On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in confirming the disallowance on account of understanding the provision contained in section 80IA of the Act regarding consideration of Other Income for the purpose of Computation of Profit eli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emption of debentures worth Rs. 500 crores during the years 2013. 2014 2015. As per section 115JB of the I.T. Act, if in the case of a corporate assessee, the income tax payable on the total income as computed in accordance with the provisions of the Act is less than 10% of its book profit, then such book profit will be deemed to be the total income of the assessee and the tax will be payable on this book profit @10%. Further, explanation-1 to section 115JB explains the meaning of book profit to be the net profit as per the profit and loss account as increased by certain amounts including the amounts carried to any reserves, by whatever name called, other than a reserve specified u/s 33AC [clause (b) to explanation-1 of section 115 JB] and as reduced by amounts listed out in clauses (i) to (viii) of the explanation. 9. A perusal of the bare provisions of the section, including the explanation-1 thereto, makes it unambiguously clear that other than reserves created u/s 33AC of the I.T. Act, amounts carried to any other reserve are to be added back for the purpose of computation of book profit as per section 115 JB. 10. The judgment in the case of National Rayon Corpn. Ltd. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be 25% of the value of debenture through public issue as per present SEBI (Issue and Listing of Debt Securities) Regulations, 2008. and no DRR is required in the case of privately placed debenture. (iii) For other companies including manufacturing and infrastructure companies, the adequacy of DRR will be 25% of the value of debentures issued through public issue as per present SEBI (Issue and Listing of Debt Securities), Regulations 2008 and also 25% DRR is required in the case of privately placed debentures by listed companies. For unlisted companies issuing debentures on private placement basis, the DRR will be 25% of the value of debentures. (iv) Every company required to create/maintain DRR shall before the 30 day of April of each year, deposit or invest, as the case may be, a sum which shall not be less than fifteen percent of the amount of its debentures maturing during the year ending on the 31 st day of March next following in any one or more of the following methods, namely:- (a) in deposits with any scheduled bank free from charge or lien; (b) in unencumbered securities of the Central Government or of any State Government; (c) in unencumbere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok profits u/s 115 JB) observed as follows: 10. In the assessment year 2007-08, the assessee had filed return declaring loss of Rs. 37,94,15,570/- under normal provisions and book profit of Rs. 47,54,42,043/-. Assessee had created a special reserve of Rs. 16 crores under Section 45-IC of the Reserve Bank of India Act, 1934. The Assessing Officer by his assessment order applied clause (b) to Explanation 1 to Section 115JB (2) of the Act and added back the said amount to Book profit. For the same reason, the Assessing Officer also made adjustment of Rs. 18,66,00 000/-, which were treated by the assessee as Debt Redemption Reserve. The Commissioner of Income Tax (Appeals) and the Tribunal have affirmed the said findings of the Assessing Officer. 11. The contention of the appellant-assessee is two-fold. Firstly, the reserve created as per the mandate of Section 45-IC of the Reserve Bank of India Act, 1934, is in fact a liability and not a reserve. Reliance is placed upon decision of the Supreme Court in National Rayon Corporation Vs. Commissioner of Income Tax (1997) 227 ITR 764 (SC), and Vazir Sultan Tobacco Company Ltd. Vs. CIT (1981) 132 ITR 559 (SC). Secondly, it is subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956) : Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act,-- (i) the accounting policies; (ii) the accounting standards adopted for preparing such accounts including profit and loss account; (iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year. (iv) Explanation [1].--For the purposes of this section, book profit means the net profit as shown in the profit and loss account for the relevant p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iia); or] [(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. Explanation.--For the purposes of this clause,-- (a) the loss shall not include depreciation; (b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil; or] (iv) the amount of profits eligible for deduction under section 80 HHC. computed under clause (a) or clause (b) or clause (c) of sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or (v) the amount of profits eligible for deduction under section 80HHE computed under sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or (vi) the amount of profits eligible for deduction under section 80HHF computed under sub-section (3) of that section, and subject to the conditions specified in that section; or (vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preneur or a Developer, in a Unit or Special Economic Zone, as the case may be. 13. As noticed by this Court in Commissioner of Income Tax (Central-II) Vs. Goetze (India) Limited [2014] 361 ITR 505 (Del), Sub-section (1) to Section 115JB of the Act begins with a non obstante expression, which gives an overriding effect to the said section. Sub-section (2) states that every assessee being a company shall prepare a Profit and Loss account for the previous year in accordance with the provisions of Part II and III of Schedule VI of the Companies Act, 1956. Explanation to the said section in the first part refers to increase in book profit by amounts specified in sub paragraphs (a) to (g). Explanation in the second part states that the book profit shall be reduced under clause (i) to (ii i). Thus, the book profits of the previous years preferred in accordance with the provisions of Part II and III of Schedule VI of the Companies Act, have to be decreased or increased as per the express mandate of the Explanation 1 to Section 115JB (2) of the Act. 14. In the present case, we are concerned with clause (b) to Explanation 1 which states that book profit prepared in accordance wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8213; provision and ― reserve were not defined in the said Act, but are well-known terms in commercial accountancy and are used in the Companies Act with reference to preparation of balance sheets and Profit and Loss account. It was held that if a sum of money had not been set apart for certain purpose, it would not be a ― provision but it did not follow that it would be a ― reserve. Referring to Part I and II of the Schedule VI, it was observed that the expression ― provision has been defined positively and meant any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which, the amount cannot be determined with substantial accuracy. However, the expression ―reserve has been defined in a negative manner, and would exclude, i.e., not include, any amount written off retained by way of providing for depreciation, renewal or diminution in value of assets, or retained by way of providing for any known liability. Therefore, an amount retained in excess of the amount retained for any known liability was not necessarily a reserve. A provision, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13; reserve and ― provision were explained as under:- ― 14.04 Reserve The portion of earnings, receipts or other surplus of any enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for a known liability. The reserves are primarily of two types: capital reserves and revenue reserves. 13.14 Provision - an amount written off or retained by way of providing for depreciation or diminution in value of assets or retained by way of providing for any known liability the amount of which cannot be determined with substantial accuracy. 20. In the case of National Rayon Corporation (supra), the assessee company had issued secured redeemable mortgage debentures against the security of land, building and machinery and a floating charge on the undertaking. The High Court held that this was merely a ―provision to enable it to redeem debentures when they became due for redemption. The aggregate amount of the debentures was higher than the amount of Debenture Redemption Reserve. The High Court on the aforesaid reasoning held that the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer also noticed that in the earlier years, the Debt Redemption Reserve was offered or added by the assessee himself for computation of book profit. The assessment order records that the assessee had created a ― reserve for meeting any kind of debt without specifying its details or particulars. 23. It is noticeable that under clause (c) of Explanation (1) to Section 115JB of the Act, amount set aside to provisions made for meeting liabilities, other than ascertained liabilities, have to be added back while computing book profit. Thus, provisions for ascertained liabilities would be excluded and are not to be added to the book profit under Explanation (1) to Section 115JB of the Act. Unascertained provisions have to be added and included. It was for the appellant-assessee to explain and show that what was treated as a Debt Redemption Reserve was in fact a provision and that too for an ascertained liability. This explanation is missing and absent. 24. The term provision' differs from liability' because liability is certain and definite amount whereas a provision is an amount which is estimated (See Note 3 of Schedule III of the Companies Act, 2013, with refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistant Commissioner and referred the question regarding deductibility of the amount transferred to the contingency reserve fund account in arriving at the taxable business income of the assessee- company directly to the Supreme Court under Section 257 of the Act. The Supreme Court on consideration of the facts and circumstances of the case and the scheme of the Electricity (Supply) Act, 1948. observed that the monies in the contingencies reserve belonged to the electricity company. The Supreme Court, therefore, repelled the claim of the assessed that there was a diversion of income by overriding title. While doing so, the Supreme Court observed:- ― The application of the doctrine of diversion of income by reason of an overriding title is quite inapposite. The doctrine applies when, by reason of an overriding title or obligation, income is diverted and never reaches the person in whose hands it is sought to be assessed. Applying the above principle to the facts of the case before it, the Supreme Court observed (page 207): ― In the present case, the statute requires the electricity company to create certain reserve if its clear profit exceeds a reasonable retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital of the non- banking financial company. 27. The reserve, which is required to be created under Section 45-IC, is out of the profits earned by a non-banking financial institution. It is not an amount diverted at source by overriding title. The Reserve Bank of India Act, 1934 can permit appropriation in respect of the said reserve. The assessee can also ask for specific directions from the Central Government subject to proviso to sub- section (3) of the said Section. 28. The special reserve under Section 40IC of the Reserve Bank of India Act, 1934 of Rs. 9.80,00.000/- and Rs. 16.00.000/- relating to Assessment Years 2006-07 and 2007-09. respectively was not on account of specific or known liability to repay. It is not the case of charge on profits. It was only appropriation of profits after they had been earned. It is not an expense. 29. During the course of argument it was ascertained and accepted on behalf of appellant assessee that the reserve under Section 45-IC of the Reserve Bank of India Act, 1934 and debt redemption reserve were below the line allocations, after computing the financial profit and were not treated and regarded as expenditure/ liability for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferred to the Debenture Redemption Reserve is an appropriation out of profits of a company. Since a provision is defined as an amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which, the amount cannot be determined with substantial accuracy, the amount set apart for transfer to Debenture Redemption Reserve cannot be a provision, as the liability to redeem debentures is known and accurate. Therefore, this has to fall within the definition of reserve which is defined negatively as excluding any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which, the amount cannot be determined with substantial accuracy, Section 115JB does not give any discretion to the Assessing Officer or to an appellate authority not to add to its profit as per P L account the amount carried to any reserve, other than reserve specified in section 33AC for the purpose of computation of book profit. In view of the above discussion, it is clear that the amount of Rs. 100 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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